Conversions: We Need More Sunlight

Regardless of whether the number of credit union charter conversions increases, we should pay more attention to related aspects not now receiving the attention they deserve. From the member’s perspective, I cannot see a good reason to convert a credit union to a mutual savings bank (MSB) other than in response to credit union taxation. For this reason, the conversion hurdle should not be so insurmountable.


Regardless of whether the number of credit union charter conversions increases, we should pay more attention to related aspects not now receiving the attention they deserve.
From the member’s perspective, I cannot see a good reason to convert a credit union to a mutual savings bank (MSB) other than in response to credit union taxation. For this reason, the conversion hurdle should not be so insurmountable.

Tax Exemption is Important

Maybe (just maybe!) there are, or will be, other circumstances that have merit. But, in my view, conversions are all too often proposed and effected without truly evaluating what is best for the members, and after this, for the communities those credit unions serve.

In the case of the conversion to a mutual savings bank, that serves only its member/ owners, it would be very difficult to justify the loss of the credit union’s tax exempt status. The primary difference would be the charter, and it would be surprising if the difference would offset the significant loss of the credit union members tax advantage. Besides, society already has access to substitutes for tax paying credit unions. They are called mutual savings banks.

In the case of the subsequent conversion to a stock owned bank it would be even more difficult to justify the loss of both the tax advantage and the stock dividend paid to stock owners including management stock ownership, options, and other incentives. Again, not so surprisingly, society has widespread access to substitutes for this alternative. They are called banks.

Critical Questions

Since these wide spread, easy to access substitutes are so readily available, why would we want to consider getting rid of one credit union to have one more mutual savings bank or stock owned bank? Could managers of credit unions outperform the managers of existing banks and MSBs by so much that they could offset the losses from the foregone tax advantage and the added cost of stock owner dividends? Are the reasons cited for conversions already solved by these substitutes or do we need more banks and MSBs to address the weaknesses of the Credit Union Act and regulatory process? Weakness such as the charter is too restrictive, capital growth is a problem, lending limits are too restrictive, NCUA is unfair . . .

Ought we also consider the economic loss of the tax advantage to a credit union’s community FOM? Does the community gain more from the members reinvestment of the tax advantage, and the related spending multiplier, or would the community gain more from the distribution of tax receipts though government spending? Do credit unions serve as a check and balance for profit banking entities? Do credit unions serve those of modest means within their communities (FOMs) and what is the value of this loss?

Should we be concerned with the “Johnny come lately,” sophisticated members, and management that will gain substantial undue equity at the expense of less sophisticated member/owners? MAYBE THE REAL STORY IS HOW A CONVERTED CREDIT UNIONS RESERVES IMPACT THE VALUE OF STOCK AFTER AN IPO. Should this be included in conversion disclosures?

Management’s Self-Interest and Sunshine

Finally, does management have an unfair advantage or conflict of interest in managing the process of charter conversions? Is management self-interest the primary driver of conversions? Do credit union trade associations and NCUA have a vested interest in maintaining the status quo? Is a society that permits a variety business ownership forms better off than one that offers fewer alternatives? Can we afford to lose one more credit union member to an alternative charter? Can we enhance the credit union charter to be viable in modern economic times? Should the loss of the tax advantage be part of the conversion disclosures?

In my view, conversions are all too often motivated by management’s self-interest. Because of this, the whole process needs more sunshine and scrutiny. The easy answer is to set the conversion bar so high no one can clear it. Because of other realities, the answer needs to be somewhere else. The problem is, self-interest left to it’s own direction will prevail. Those of us that are concerned for the future of credit unions need to “belly up to the bar” and effect a reasonable solution to this complex and pressing issue. As history tells us, will self-interest prevail or can this be managed? Am I wrong? What say you?




Jan. 26, 2004


  • Response to previous comment - credit unions and cooperatives should not become social welfare organizations or homes for "retired" bankers. They were not formed for this purpose. They were formed so the individuals involved could increase their personal net worth. The competitive marketplace will ultimately fill "voids". If Walmart gets into banking, it will give credit unions an education and boost its stock price. Frankly, it probably does more to serve the underserved today than the sum of credit unions.
  • This is a very interesting topic, but the writing style was excruciating, at best, to read. It is highly atypical of the articles that usually appear. Maybe this one just slipped through the editing process.
  • I've been in this industry for just under 30 years, so I've seen many trends come and go. CU's would go from State to Federal charter and back again, depending in the capricious nature of NCUA or a particular state. But, we’ve never seen credit unions so boxed in by the regulators as we now are seeing. NCUA is so risk adverse that credit unions can not expand to meet their member’s needs without hitting PCA triggers. Our state (California), won’t look outside what NCUA views as risk limits – we might as well have a Federal charter at this point. Given that and the current market of overlapping membership, and merger-mania, credit unions must look at ALL alternatives to continue their job of serving the members needs. Is there abuses? DUH! We see that now with the FOM evolution. Early converters and aggressive marketers have run wild with FOM’s… do you think it’ll be any different in the future? We haven’t seen the entire effect of all the FOM expansions yet, and we’re adding the charter conversion. What were the merger numbers this year? 200+! You ask about saving the institution of credit unions…. We aren’t what we used to be by a long shot and the regulators aren’t directing the ship or controlling the sailors.
  • Well-said. Bank conversions are nothing more than self-interest on the part of management and board.
  • Failure to see the future.
  • It's a very "interesting" subject but that's not really the point. Mr. Arnold's rambling, incoherent arguments leave a reader unclear as to exactly what solutions he might be proposing. It's obvious he's against the MSB conversion option for credit unions but he has no answers to address the shortcomings of the CU charter. His article focuses primarily on taxation, as if the tax subsidy enjoyed by credit unions is a blessing and, in turn, taxation a curse. If that is the case, why are so many converted credit unions more profitable as MSBs? As for the "future of credit unions," with more than 9,000 of them, I don't think a couple of dozen conversions represents much of a "concern." There's no question MSB conversions are a "complex" issue but I don't see it as a "pressing" one. Use of the word "solution" implies there's a problem. For whom is it a problem, exactly?
  • When taxation arrives it will be too late for conversion to a bank. It will be like someone shouted "FIRE" in a crowded theater. NCUA and the Credit Union State and Federal Trade Associations will have chained most theater doors. Apologists like you will have helped them do it. In addition, by that time the bank regulators will be much more selective about who they let through the conversion door. Adverse selection will continue to destabilize the NCUSIF (unless commercial lending gets it sooner) until it will require a bailout and merger with FDIC. CU leaders like you will wonder what happened - wonder who to blame. Sounds bleak - it's reality.
  • Credit union leaders arguing to stay a credit union are motivated by self-interest as much as those converting to a bank. After all, for some, conversion means loss of revenues, accountability, and more work. Ask: Does remaining a credit union allow directors and officers to conceal compensation and benefits? The lack of accountability? Lack of performance? The taking advantage of the disadvantaged to justify a tax exemption? Hiding under the shroud of "service to the underserved" when the facts show otherwize? A few vocal credit union manager conversion critics I've read about have over 15% capital ratios and 30% loan to deposit ratios - hello? What are they hiding behind? Perhaps more "sun" should "shine" on CU management compensation and director compensation? Performance? Most business "owners" would want to know what their "employees" make, wouldn't they? Why is it not disclosed? Why not disclose how much is spent on director travel, spouse or significant other travel, director health insurance premiums, etc., etc.? Banks do it, their owners expect it. Also, why not disclose the dollar amount of loans and infrastructure development (jobs, branches, etc.) being denied members and communities because credit unions carry excess capital levels? Because they have to operate at higher capital levels than banks? Because of the many operational and marketing inefficiencies? Perhaps credit union "owners" should know how much lower a yield they are getting because they are funding growth from retained earnings? Why grow anyway - is it because management of the credit union wants to earn more by being in a higher peer group? Do directors get to go to more conferences? If conversion to a bank is not your cup of tea - fine. But - take care of your problems and self interest before passing judgment on others.
  • Though taxation is a consideration, the goals and objectives of the credit union movement may be more to the point. If credit unions become banks, regardless of the rationale, they will have to act like banks to survive, particularly given the tax issue. This will mean ignoring less profitable accounts in favor of more profitable accounts. While senior CU management promoting conversion to thrift could be looking to line their pockets with stock options or other compensation, the more important question to ask is, who will fill the void left by converting credit unions. Credit unions exist because banks failed to answer the bell when summoned. The inherent philosophical difference between credit unions (serving the member) and banks (return on investment) dissipates with conversion to a thrift. After becoming a thrift (or bank if you prefer), instead of providing additional or improved service, more focus will be placed on generating revenue, and that is hardly serving the underserved, one of the primary focuses of the CU movement. Though there are a few remaining examples of banks and thrifts formed for social purposes, the vast majority died a sad and repeated death because return to stockholders was eventually deemed more important than service. Many CU professionals would agree that, in certain service areas credit unions are being capriciously foreclosed from providing a decent level of service. But in other areas, there has been and continues to be progress in providing the services members need. I too am impatient and want to move more quickly, but I am also increasingly aware that credit unions provide a service that no other financial instituion will attempt. We cannot lose sight of how and why we got here. I close by admitting that I am a reformed and still recovering banker of many years.